Global Listed Infrastructure Monthly review and outlook

Global Listed Infrastructure rose in June, supported by a backdrop of positive investor sentiment.

The best performing infrastructure sector was Energy Midstream (+7%), aided by a positive outlook for natural gas demand. Railroads (+6%) also outperformed. Healthy US economic data points, including strong May employment numbers and a higher-than-expected number of new residential construction projects, raised hopes that North American freight haulage volumes may soon begin to improve.

The worst performing infrastructure sector was Water / Waste (-2%). Concerns that privately owned UK water utility Thames Water was at risk of defaulting on its debt and could be taken under government control weighed on listed peers Pennon (-8%, not held), Severn Trent (-5%, not held) and United Utilities (-2%, not held).

The best performing infrastructure region was Japan (+6%), led higher by its electric utilities. An apparent shift within corporate Japan, with companies being urged to place greater emphasis on profits and share prices, has provided an additional tailwind to the country’s infrastructure stocks and broader stock market in recent months. The worst performing infrastructure region was Australia / NZ (-2%), owing to underperformance from the region’s toll roads and airports.

The Portfolio invests in a range of listed infrastructure assets including toll roads, airports, railroads, utilities and renewables, energy midstream, wireless towers and data centres. These sectors share common characteristics, like barriers to entry and pricing power, which can provide investors with inflation-protected income and strong capital growth over the medium-term.

Toll roads remain the portfolio’s largest sector overweight. Robust traffic volumes and inflation-linked toll increases are leading to healthy earnings growth. We are alert to potential headwinds, such as an economic slowdown leading to a dip in truck traffic on longer distance roads; or soft commuter traffic levels on some intra-city roads as the return-to-office trend settles. Overall however we expect toll roads to remain strong performers as higher tolls support earnings growth, and demand proves resilient.

The portfolio is slightly overweight towers / data centres. Consumers and businesses alike continue to move activities onto digital platforms, underpinning growing demand for communication infrastructure assets. While concerns for leasing demand have weighed on the sector recently, and higher interest rates have proved more of a headwind to earnings growth than in previous years, these factors are now better reflected in valuation multiples.

A substantial part of the portfolio consists of utilities / renewables stocks. Decarbonisation, electrification and resiliency spend represent large and growing investment opportunities for these companies. However North American utilities in particular have lagged in the first half of this year, as defensive assets have been overlooked by investors. We believe the extent of this underperformance appears to be extreme, given the utilities’ generally sound fundamentals, undemanding valuation multiples and substantial longer term growth drivers.

The portfolio’s largest underweight position is to the airports sector. Following strong share price gains driven by the postcovid passenger recovery, mispricing in this space is becoming less evident. We remain most positive on airport operators with exposure to tourist-focused destinations, particularly those serviced by low cost carrier airlines.

Source : Company data, First Sentier Investors, as of 30 June 2023.